Gold Valley Iron and Manganese Pty Ltd v Albarran
[2020] WASC 297
•20 AUGUST 2020
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: GOLD VALLEY IRON AND MANGANESE PTY LTD -v- ALBARRAN [2020] WASC 297
CORAM: CURTHOYS J
HEARD: 28 APRIL 2020
DELIVERED : 20 AUGUST 2020
FILE NO/S: COR 21 of 2020
BETWEEN: GOLD VALLEY IRON AND MANGANESE PTY LTD
Plaintiff
AND
RICHARD ALBARRAN
First Defendant
BRENT KIJURINA
Second Defendant
CAMERON SHAW
Third Defendant
HAMPTON TRANSPORT SERVICES PTY LTD ACN 008 733 060
ELMORE LTD (ACN 057 140 922)
Intervenors
Catchwords:
Costs - Indemnity costs - Hopeless case - Insolvency
Legislation:
Corporations Act 2001 (Cth), s 447A
Result:
Indemnity costs ordered
Category: B
Representation:
Counsel:
| Plaintiff | : | Ms V E Long-Droppert |
| First Defendant | : | Mr J E Scovell |
| Second Defendant | : | Mr J E Scovell |
| Third Defendant | : | Mr J E Scovell |
| Intervenors | : | Mr J P Cook |
Solicitors:
| Plaintiff | : | Justice Legal Pty Ltd |
| First Defendant | : | Pragma Legal |
| Second Defendant | : | Pragma Legal |
| Third Defendant | : | Pragma Legal |
| Intervenors | : | Andrew Barclay & Associates & Mendelawitz Morton Commercial Lawyers |
Case(s) referred to in decision(s):
Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270
Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711
Flynn v Theobald [2008] WASC 263
Jones v Dunkel (1959) 101 CLR 298
Re Love [No 1] (2003) 44 ACSR 367
CURTHOYS J:
Introduction
These reasons consider whether indemnity costs should be ordered following an unsuccessful application to remove administrators.
The appointment of administrators
Section 436C(1) of the Corporations Law provides:
A person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company's property may by writing appoint an administrator of the company if the security interest has become, and is still, enforceable.
The initial sale agreement between Gold Valley Iron Pty Ltd (GVI) and Elmore (previously Indiore Ltd) provided in cl 4.2 that the security became immediately enforceable upon GVI becoming insolvent.
On Monday17 February 2020 Richard Albarran, Brent Kijurina and Cameron Shaw were appointed as administrators of GVI. The administrators were appointed by Elmore a creditor of GVI.
The s 447A Application
On 20 February 2020 the plaintiff brought an application pursuant to s 447A of the Corporations Act 2001 (Cth). The application was listed for hearing on 24 February 2020.
Section 447A of the Corporations Law provides:
(1)The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2)For example, if the Court is satisfied that the administration of a company should end:
(a)because the company is solvent; or
(b)because provisions of this Part are being abused; or
(c)for some other reason;
the Court may order under subsection (1) that the administration is to end.
The application sought:
1.that Richard Albarran, Brent Kijurina and Cameron Shaw as representatives of Hall Chadwick be removed as administrators of (GVI);
2.that the administration of GVI be terminated forthwith;
3.interim directions and injunctions as to the conduct of the administration pending the final determination of this application;
4.costs; and
5.such further or other orders as this Honourable Court thinks fit.
On the same date the plaintiff filed an application for interlocutory relief seeking interim directions as to the conduct of the administration pending the final determination of the application.
The plaintiff's application was supported by an affidavit of Yuzheng Xie sworn on 20 February 2020. The affidavit and attachments comprised 129 pages.
These proceedings were dismissed at a directions hearing on 28 April 2020.
In Flynn v Theobald [2008] WASC 263 [64] Beech J as he then was stated:
In an application for an order under s 447A, in a case where the administrators were appointed under s 436C, the ability of the company to pay the secured debt which has triggered the right of appointment will be of central significance to an assessment of the company's solvency. However, if, taking that ability into account, the company is solvent, the solvency of the company would, in my opinion, be a circumstance enlivening the discretionary power under s 447A.
It follows that in order to enliven the discretionary power under s 447A the applicant must establish that the company is solvent.
As Beech J went on to say:
76Insofar as the plaintiff invokes s 447A(2)(a), the plaintiff bears the onus of establishing that the Company is solvent.
77In the context of an application to wind up a company which is presumed insolvent as a consequence of failure to comply with the statutory demand, it has been said that in order to discharge the onus of proving solvency the company should present the 'fullest and best evidence of the financial position of the company': Expile Pty Ltd v Jabb's Excavations Pty Ltd[2003] NSWCA 163; (2003) 45 ACSR 711 [16]. Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Expile [16]; Lesley v Howship (463).
78As to the need for cogent evidence in order to prove solvency, see also Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd[2005] NSWSC 186 [28] and following.
The costs issue
The defendant and the second intervenor seek indemnity costs. The plaintiff submits that the costs order should be limited to party‑party costs.
The defendant's submissions
The defendant submitted:
A threshold issue for the Court to consider granting the relief sought in the Originating Process and the Interlocutory Process is whether the Company was solvent. In that regard, it would not be consistent with the objectives of pt 5.3A of the Act to terminate the administration of an insolvent company.[1]
[1] Flynn v Theobald [2008] WASC 263.
The said affidavit of Mr Xie contained no evidence (or no sufficient evidence) of whether the Company was solvent. There was no reason why such evidence could not have been provided by Mr Xie, given that as director of the Company (in breach of his duties under s 438B and s 438C of the Act) he had not delivered to the defendants the books and records of the Company.[2]
[2] Affidavit of Cameron Shaw sworn and filed 24.02.20 (eCourt # 9) [34], [35], [40] ‑ [42].
Given the plaintiff's failure to put on evidence as to solvency, the Court may draw an inference that was because it knew the Company was indeed insolvent.[3]
[3] Jones v Dunkel (1959) 101 CLR 298, 320.
The defendants were forced to put on significant affidavit evidence in response to the Originating and Interlocutory Processes, as to the status of the administration and solvency of the Company, which appeared to be insolvent based on the information obtained by, and available to, the defendants.[4]
[4] Affidavit of Cameron Shaw sworn and filed 24.02.20 (eCourt # 9) at [31] ‑ [37].
On 23 February 2020, the plaintiff filed and served a proposed minute of order to be sought at the interlocutory hearing of the matter, including to postpone the first meeting of creditors of the Company (which had been convened for 25 February 2020), to obtain access to proxy voting forms prior to the first meeting and for the appointment on an independent chairperson for the first meeting. There was no proper basis for seeking these orders under s 447A of the Act as the plaintiff failed to articulate which provisions of pt 5.3A were to be modified and how the orders would facilitate the objects of pt 5.3A which are expressly articulated in s 435A of the Act.
At the interlocutory hearing on 24 February 2020 before Justice Curthoys:
(a)The plaintiff abandoned seeking an order to postpone the first meeting but pressed for the other orders sought;
(b)His Honour did not make the orders sought by the plaintiff in respect of the first meeting and held there was no basis for same;
(c)The matter was adjourned with directions for the plaintiff to file any reply evidence as to solvency by 27 February 2020.
At the hearing on 28 April 2020 before Justice Curthoys:
(a)The plaintiff sought to discontinue the proceedings with no order as to costs;
(b)His Honour dismissed the proceedings.
The plaintiff was wholly unsuccessful in obtaining any of the relief sought from the Court in both the Originating Process and the Interlocutory Process. Costs should follow the event and, in the circumstances, warrant a special costs order being made.
The proceedings were ill-conceived and have unnecessarily wasted costs, time and Court resources.
The defendants submit that the proceedings were doomed to fail from the start, given the solvency evidence noted above, and that indemnity costs should be ordered against the plaintiff.
The plaintiff, being the Company's parent company, acted unreasonably in bringing the proceedings without sufficient evidence as to solvency, seeking orders without basis and subsequently abandoning most of the relief sought, thereby exposing the Company to significant wasted costs of defending the proceedings.
If indemnity costs are not ordered against the plaintiff, that may prejudice the creditors of the Company, given that the defendants' primary recourse for payment of costs of these proceedings would be from the Company's assets,[5] which assets would otherwise be available for distribution to creditors.
Accordingly, the proper order ought be that the plaintiff pay the defendants' costs to be indemnified on a solicitor/own client basis to the extent that those costs have been reasonably incurred.
[5] Pursuant to s 443D of the Act.
Second intervener's submissions
The second intervener submitted:
Section 435A of the Act expressly provides for the object of pt 5.3A. The plaintiff itself cited that object, at [9] of its submissions dated 21 February 2020.
At the hearing on Monday, 24 February 2020, the plaintiff was invited to explain how the Application promoted that object.
The plaintiff was unable to articulate a proper response. That conceptual lacuna is the root cause of why the Application was always a hopeless case.
By the time of the hearing on 24 February 2020, the plaintiff had practically capitulated – see its minute of proposed orders filed on Sunday, 23 February 2020.
It sought only to change the chairperson of the first creditors meeting and to obtain copies of proxies and proofs of debt. That never required Supreme Court action.
The plaintiff's capitulation was inevitable. The plaintiff had not provided a skerrick of proper evidence to establish GVI's solvency.
The plaintiff is the sole shareholder of GVI. Mr Yuzheng Xie is a director of the plaintiff and the sole director of GVI. He knows, or ought to know, GVI's financial position. Yet his affidavit failed to give any proper evidence of solvency.
Mr Xie's affidavit dated 20 February 2020 manifestly failed the legal obligation to present the 'fullest and best evidence of the financial position of the company'.[6]
At the hearing, Counsel for the plaintiff, amongst other things referred to the possibility of Mr Xie seeking 'safe harbour' in relation to GVI. In effect that was an admission of GVI's insolvency. But it came too late to avoid the costs incurred.
By 28 April 2020, the plaintiff had engaged new solicitors and counsel. At the directions hearing of that date, new Counsel asserted the plaintiff's continuing belief in GVI's solvency. As His Honour put it, belief is one thing, evidence is another.
In this case the plaintiff made all manner of allegations directed at the conduct of the second intervener (abuse of process – at [5] plaintiff's submissions). None of that was made out, nor did it address the real issue, being GVI's substantive insolvency.
The plaintiff filed another affidavit, of John Robert Reynolds dated 28 April 2020. Page 5 of that affidavit shows that GVI was placed into creditors' voluntary winding up on 19 March 2020, with unpaid debts of approximately $15,000,000.
In effect the Application failed from the outset. It failed for the very reasons set out in the Second Intervener's Submissions dated Sunday, 23 February 2020. In other words, this is not a matter of hindsight, but rather obvious foresight.
The Application reflects the plaintiff's unreasonable belief in GVI's solvency and its failure to appreciate the object of pt 5.3A of the Act. That belief persists, in spite of the fact that GVI is now in liquidation.
The second intervener seeks that the Court exercise its discretion to award indemnity costs in its favour against the plaintiff, by reason of the plaintiff's unwarranted persistence in its consistently hopeless case
[6] Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 [16].
The plaintiff's submissions
The plaintiff submitted:
(a)costs should be awarded on a party-party basis as between the plaintiff and the defendant; and
(b)the second intervenor should bear its own costs.
Nothing about these proceedings attract the principles associated with the award of indemnity costs for impropriety or unreasonableness on the part of the plaintiff.
In circumstances where GVI is now in liquidation, the principles elucidated in Swansdale Pty Ltd v Whitecrest Pty Ltd [2010] WASCA 129 (S) at [10] in relation to pursuing a hopeless case may be relevant in this case.
Those principles require that a balance be struck between discouraging a party, by the prospect of an unusual costs order, from persisting with an action where success is not certain and making a party responsible for running up costs in unnecessary or hopeless proceedings.
The defendant and second intervenor's problem with the plaintiff's application is that they contend at the time of making the application, GVI was insolvent.
However, while GVI's insolvency made it undesirable to remove the then administrators and terminate the administration at the interlocutory stage, it was not a factor in:
(a)the plaintiff's ability to bring the application for relief under s 447A; nor
(b)the success of the order sought by the plaintiff to have the then administrators removed.
The scope of the court's powers to make orders under s 447A is very broad. Indeed, a decision of the High Court in Australasian Memory Pty Ltd v Brien[7] is authority for the proposition the section can be used in circumstances where the company has transferred out of voluntary administration and into a creditors' voluntary liquidation.
[7] Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270.
It is true, also, that relief awarded under s 447A may operate upon or in relation to some past event or an already established state of affairs by changing what would otherwise be its consequences.[8]
[8] Re Love [No 1] (2003) 44 ACSR 367; NSWSC at [7] per Barrett J.
As outlined in the annexure to the affidavit of Yuzheng Xie marked YX-10, the main reasons for bringing the application were that the appointment of the then administrators was an abuse and that they were not sufficiently independent.
If the then administrators had not been removed at the first creditors meeting, the plaintiff's application regarding their removal could have continued notwithstanding GVI was put into liquidation. GVI's solvency was a relevant factor to the success of that part of the application, but was certainly not the only one.
If successful, orders made in favour of the plaintiff under s 447A could have operated in relation to a past event to rectify what the plaintiff said was an invalid appointment. GVI's insolvency was not a bar to that outcome.
Those are not the hallmarks of a hopeless case deserving of an award of indemnity costs pursuant to the principles outlined in Swansdale.
Finally, in relation to the termination of the administration:
(a)at the time of bringing the application the plaintiff considered that at the time of bringing the application, GVI was solvent;[9] and
(b)as evidenced in Korda Mentha's report dated 12 March 2020, the date of GVI's insolvency was not, even then, readily apparent.[10]
The second intervenor's intervention was unnecessary. The Affidavit of Mr Mendalawitz did not depose to anything material to the outcome of the interlocutory process that had not already been covered by the Affidavit of Mr Shaw for the defendant. It should not be awarded costs.
[9] Affidavit of Yuzheng Xie dated 20 February 2020 [54] ‑ [58], [64].
[10] Affidavit of John Reynolds dated 28 April 2020, 33.
General principle in relation to indemnity costs
Paragraph 66.1.13 of Civil Procedure Western Australia sets out the general principles relating to indemnity costs
In Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S); BC201009419 at [10] , the Court of Appeal set out the principles applicable to the making of indemnity costs orders in litigation as follows:
1.A superior court, in its inherent jurisdiction, may make an indemnity costs order.
2.An indemnity costs order departs from the usual costs disposition order, whereby costs are awarded on a party/party basis;
3.The court's discretion as to the making of an indemnity costs order is a discretion that must be exercised judicially. In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397 at 400 Woodward J said:
Courts in both the United Kingdom and Australia have long accepted that solicitor and client costs can properly be awarded in appropriate cases, where 'there is some special or unusual feature in the case to justify the court exercising its discretion in that way'. (emphasis added)
4.To obtain an indemnity costs order, it is not the case that the successful party needs to show a collateral purpose, or establish some species of fraud against the unsuccessful party. In J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA Branch) (No 2) (1993) 46 IR 301, at 303; [1993] FCA 70 ; French J by reference to the observations of Woodward J in Fountain Selected Meats, said:
It is sufficient, in my opinion, to enliven the discretion to award such costs that, for whatever reason, a party persists in what should on proper consideration be seen to be a hopeless case.
5.Furthermore, in Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd (Unreported, FCA, 3 May 1991) (referred to by Ipp J in Unioil International Pty Ltd v Deloitte Touche Tohmatsu (No 2) (1997) 18 WAR 190, at 191 French J observed:
The categories in which the discretion may be exercised are not closed.
6.Competing principles need to be balanced in assessing the making of a potential award of indemnity costs. In Quancorp Pty Ltd v MacDonald [1999] WASCA 101 at [7], Wheeler J observed:
On the one hand, a party should not be discouraged, by the prospect of an unusual costs order, from persisting in an action where its success is not certain. Uncertainty is inherent in many areas of law, and the law changes with changing circumstances. It is inappropriate that a case be too readily characterised as 'hopeless' so as to justify an award of indemnity costs to the successful party. However, where a party has by its conduct unnecessarily increased the cost of litigation, it is appropriate that the party so acting should bear that increased cost. Persisting in a case which can only be characterised as 'hopeless' is an example of the type of conduct which may lead the court to a view that the party whose conduct gave rise to the costs should bear them in full.
7.An indemnity costs order may be appropriate in situations which are shown to involve some element of improper, or at least unreasonable, conduct by a party or the party's legal advisers.
8.A properly crafted special costs order may obviate the need for an indemnity costs order, where components of cost scale items are allowed above the applicable scale ceiling.
9.An indemnity costs order may not be appropriate if the claimed costs would be likely to be recovered under the standard order for party and party costs, or under a special order raising or removing a scale ceiling allowance. In Unioil (No 2) (at 193), Ipp J observed:
However, counsel for the plaintiffs was unable to identify any costs so incurred that would not be covered by an order for party and party costs. An order for indemnity costs on this ground is therefore not warranted.
10.Nonetheless, an indemnity costs order will constitute an appropriate sanction marking the disapproval of improper or unreasonable conduct: see Brookvista Pty Ltd v Meloni [2009] WASCA 180 at [32], Flotilla Nominees Pty Ltd v Western Australian Land Authority (2003) 28 WAR 95; [2003] WASC 122 (S) [25] . In Flotilla Pullin J said at [26]:
A solicitor should not, in my view, resort to an application for an indemnity costs order merely to secure the recovery which could be achieved by a properly formulated special costs order, unless the unsuccessful party's conduct is genuinely to be impugned by the successful party.
See also Frigger v Professional Services of Australia Pty Ltd (No 2) [2016] WASCA 68; BC201602893 at [81]. An order for indemnity costs may be appropriate in circumstances where proceedings have been found to constitute an abuse of process, particularly where the proceedings otherwise have no arguable merit: Frigger v Kitay (No 2) [2017] WASCA 139; BC201706594 at [120] and Glew v City of Greater Geraldton [2012] WASCA 94; BC201202747 at [11].
Application of principles
Solvency?
Despite the length of the affidavit and the attachments at no point did Mr Xie depose to the solvency of GVI.
The affidavit in support failed to establish the GVI was solvent. A crucial element of the entitlement to relief was absent from the affidavit.
The plaintiff's interlocutory process was dismissed on the basis that the administration should continue because evidence filed in the proceedings by the defendant and two intervenors suggested that GVI was insolvent.
On 24 February 2020, a day after the interlocutory process was dismissed, a meeting of creditors of GVI unanimously resolved to remove and replace the then administrators. GVI has since been put into liquidation.
I am satisfied that the plaintiff's case was hopeless from the start. There was no direct evidence as to the insolvency of GVI when the proceedings were commenced. The plaintiff's affidavit failed to address a fundamental issue - that of the solvency of GVI. The plaintiff bore the onus of proving GVI's solvency.
The fact that GVI was placed into a creditors' voluntary winding up on 19 March 2020, with unpaid debts of approximately $15,000,000, less than a month after the filing of the application leads to a reasonable inference that GVI was insolvent at the time the application was filed.
It is not to the point to contend, as the plaintiff does, that the defendant's evidence did not conclusively establish GVI's insolvency ‑ the onus was on the plaintiff to establish solvency.
In effect, the plaintiff submits that it would still be entitled to substantive relief and therefore indemnity costs should not be ordered.
Whatever the plaintiff's theoretical right to continue the application it did not do so.
Further, Australasian Memory Pty Ltd v Brien[11] does not support the plaintiff's case. That is a case about the power to validate a creditor's meeting where the second creditor's meeting was held 8 days too early. It says nothing about substantive relief as compared to procedural relief. Similarly, Re Love [No 1] related to a procedural matter and does not support the plaintiff's proposition.
[11] Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270.
The plaintiff's reliance on the belief of Mr Xie that GVI was solvent is no substitute for objective evidence that GVI was solvent. The fact that Mr Xie 'had spent many hours in recent weeks negotiating a sale contract' without actually signing a contract before the appointment of the administrators is a long way from a concluded contract. Especially, when it appears that the amount of the advance payment (stated to be between US$1,200,000 to $US1,400,000) had not been agreed.
Should the second intervener receive indemnity costs?
Mr Mendalawitz was a director of Elmore - that company that appointed the administrators. It was appropriate the Elmore be joined and that he deposed to the matters detailed in his affidavit. If the administrator had been removed it may have had a substantial impact on Elmore's security. Elmore is also entitled to indemnity costs on the same basis that the defendants are entitled to indemnity costs.
Orders
I am satisfied that an indemnity costs order will constitute an appropriate sanction marking the disapproval of improper or unreasonable conduct by the plaintiff in persisting with a hopeless case.
I order that the plaintiff should pay all the costs incurred by the defendant and the second intervener except in so far as they are of an unreasonable amount or have been unreasonably incurred, so that subject to the above exceptions the defendant and the second intervener are completely indemnified by the plaintiff for their costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
MDM
Associate to the Honourable Justice Curthoys19 AUGUST 2020
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